Over the years, Jack and Alicia both contributed to the success of Jack’s CPA firm. When they decided to divorce, the CPA practice became a point of contention in an already contentious situation. Just how much of the firm was Alicia entitled to receive in the divorce settlement? To figure this out, Jack, Alicia, and their attorneys needed to know how to value a professional practice.
Division of Separate and Community Property
You would think it was fairly easy to decide whether property was community property or separate property. The property you bring into a marriage is your separate property and property acquired during the marriage becomes community property. However, dividing separate and community property can be a complex process.
Property brought into a marriage as separate property by one spouse may increase in value due to the efforts of the other spouse. Is the property still separate or has it become community? Should only the increased value become part of the marital estate?
Also, it can be difficult to keep separate property truly separate when a couple mingles their bank accounts. Bills and expenses for separate property may be paid for from community funds, which further muddies the waters.
Before dividing assets in a divorce, you usually need to know the value of the assets. The ways to value a professional practice are complicated.
The True Worth of the Professional Practice
There’s more to a business than its physical assets. Appraisers may consider the following when analyzing a professional practice:
- Value of fixed assets, certain accounts receivable, work in progress that has not been billed, goodwill, and the practice’s liabilities.
- Standard or fair market value, which may be difficult to determine for a professional practice.
- Date of valuation, which is usually the date of separation or the day after separation when applied to professional practices.
- Average income, net earnings, or past earnings.
The valuing of a professional practice is perhaps one of the most complex financial aspects of any divorce. When this type of business is involved, it is crucial that the parties hire attorneys who understand asset valuation.